Coffee prices fall, but not at Starbucks

Wholesale coffee prices have fallen by almost a third in the past year, but experts don’t expect the retail price for a cup of joe to do anything but go up.

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The price of Arabica coffee for delivery in December dropped nearly 2% to $1.0150-per-pound, the lowest close for the most actively traded contract since Sept. 14, 2006, on the ICE Futures U.S. exchange, The Wall Street Journal reported last week. In fact, prices for Arabica beans — the coffee most people drink — have fallen 29% this year. Why? Supply is plentiful in Colombia and Central America, where much of the coffee that ends up in the American market is grown.

But while coffee companies, cafes, and corner delis often raise prices, they rarely cut them. In June 2013, Starbucks
SBUX, +0.33%
increased prices on around one-third of beverages at U.S.-operated stores by an average of 1%. In 2012, Starbucks increased the prices of many drinks by around 1% in much of the Northeast and Sunbelt, including in New York, Boston, Atlanta and Dallas. That followed a 17% hike on Starbucks packaged coffee in 2011. The company hasn’t cut prices in Starbucks stores this year, despite the fall in wholesale prices. In May of this year, Starbucks says it did decrease list prices by 10% or more on 12 oz. bags of Starbucks and Seattle’s Best packaged coffee sold in grocery stores.

J.M. Smucker Co., which sells packaged Dunkin’ Donuts and Folgers coffee, reduced coffee prices by 6% last year, but it had hiked them by 23% in 2011. The good news: Most other grocery stores have adjusted their prices: A 1-pound can of ground coffee sold for $5.09 in September, down 11% over the last year, but they’re still up more than 74% over the last 10 years, according to the Department of Labor.

Americans tend not to care about the price of coffee — at least not in the same way that they are sensitive to minute fluctuations in the price of a gallon of gas, currently more than $3 a gallon, experts say. Unless there is a “material slowdown” in traffic, specialty coffee chains will continue to charge the same or more for their drinks, says R.J. Hottovy, an equity analyst at Morningstar. Companies like Starbucks have successfully transformed the humble coffee bean into a premium product. “Starbucks is now one of the most powerful brands in the country,” adds Jack Russo, a consumer analyst with brokerage Edward Jones, “and when you have a premium product, you can charge premium prices.”

So will Starbucks consider dropping prices? The company does not discuss future pricing plans for competitive reasons, says spokesman Zack Hutson. Of course, there are other reasons why Starbucks remains popular. Customers go there for the jazz music and free Wi-Fi, which encourages them to lounge with their iPads for hours (when the sockets are not covered up in certain locations to keep the stragglers moving) — often nursing cold cups of coffee. Regular customers can build up loyalty points for free drinks and, in the past, Starbucks has sold $10 e-gift cards at 50% off through the daily deal site LivingSocial.com. Coffee commodity costs historically comprise only 8% to 10% of Starbucks’ overall operating expenses, Hutson says, citing other costs like rent, labor, equipment, materials, and commodities such as fuel , energy and dairy. But analysts say customers may not always be prepared to pay nearly $5 for a 16-ounce “grande” or medium Starbucks Frappuccino. “They do have to be careful,” Russo says. “Consumers are starting to watch what they spend.”

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